FHA Loans

hudimgFHA insured loans are a type of Federal Assistance and have historically allowed lower to middle income Americans to borrow money for the purchase of a new home, or for the refinance of an existing mortgage loan, that they would not otherwise be able to afford.

The Federal Housing Administration (FHA) was originally established in an effort to provide much needed support, and resources to a crippled and struggling housing market devastated by the Great Depression. In 1934, in a response to the ongoing economic calamity of depressed economy, Congress passed The National Housing Act, which amongst other things, created the FHA, to primarily increase home construction, reduce unemployment, and operated various loan insurance programs.

In the eighty (80) years since, the FHA has been a popular choice for home-buyers and home-owners, especially during times of economic recession, and weak housing markets. The FHA has continued to serve its primary purpose of supporting homeownership in the United States, by being the most popular choice for potential home-buyers and home-owners during the first few years of the Great Recession of 2008 – 2009, and peaking in 2010, during a time when most other options to finance a home, either went away completely, or constricted to a point, that only a small percentage of borrowers would be eligible.

One point of common confusion is that many believe that FHA is a mortgage lender, but in actuality, FHA only provides mortgage insurance on loans made by FHA-approved mortgage lenders throughout the United States and its territories. Therefore, FHA does not make loans directly – it only insures loans made by private mortgage lenders to homebuyers and guarantees those loans in case of default. Therefore, any losses are at the expense of the American Taxpayer, and according to the Government Accountability Office, U.S. Taxpayers (through FHA) guaranteed nearly $350 Billion in mortgage insurance from 2008 through 2012 alone.

The most common reason potential home-buyers end up using an FHA insured loan when purchasing a new home, or current home-owners end up using an FHA insured loan when refinancing their home, is because there’s simply no other choice usually because of the following examples:

Down Payment Help

Down-Payment Assistance:

In most cases, FHA insured loans are the only loans that allow for a prospective home-buyer to utilize an approved Non-Profit or Government Down-Payment Assistance Homeownership Program.

While there are a handful of Conventional Mortgage Loans that will allow for DPA’s, since FHA’s down-payment requirements are less than their Conventional counterparts, it’s simply not as easy to obtain the assistance needed when using a Conventional Mortgage Loan.

Higher DTI

Higher Debt-to-Income (DTI) Ratios:

In some cases, FHA will allow a borrower’s back end DTI ratio (the ratio that includes all monthly payments in addition to the proposed monthly mortgage payment) to be as high as 55%.

Very rarely do Conventional Mortgage Loans allow for a borrower’s back end ration to be any higher than 45%, unless the borrower is investing a down-payment of 20% or more of the home’s purchase price. Furthermore, when it comes to certain debts like Student Loans, FHA (with certain conditions) will allow for a monthly payment that is in deferment and/or forbearance to be excluded from the borrower’s DTI ratios.

Conventional Mortgage Loans will not allow for this under any circumstance.

Gifts

Gifts:

Although the Private Mortgage Insurance Companies and many investors have now started to loosen up on a borrower’s ability to use Gift Funds for down-payment and closing costs when using a Conventional Mortgage Loan and it’s not impossible, Government backed loans which include FHA are the only loan programs that allow for 100% of the down-payment and all closing costs and pre-paid expenses to be derived from a cash Gift from a close friend or family member.

Credit Issues

Recent Derogatory Credit Issues:

FHA loans, along with their Government counterparts (VA and USDA) are the most lenient when it comes to major credit issues in a borrower’s past, such as Foreclosure, Short-Sale, or Bankruptcy. Government loans will also be okay with open Federal and State Tax Liens as long as the borrower is in an active repayment plan and can show that he/she has made the previous twelve (12) months payments on time and is not considered delinquent.

Also, many minor credit issues, such as open collection accounts, recent late payments, etc. are okay with FHA, VA, and USDA. Last, FHA and it’s other Government counterparts, will actually consider and in many instances allow for a borrower who is currently and actively paying off a Chapter 13 Bankruptcy to be approved for a new mortgage loan whether for a refinance or purchase.

There are tighter rules when it comes to getting approved for a Government loan when in a Chapter 13 Bankruptcy, but in our experience, as long as the borrower meets these tighter guidelines, they get approved with no issues.
Non-Occupying Co-Borrowers/Signers: Although non-occupying co-borrowers/signers are also allowed on Conventional Mortgage Loans backed by Freddie Mac, it’s much easier to get approved on an FHA loan with a non-occupying co-borrower/signer.

Refi’s

Streamline Refinances:

FHA makes it very easy to refinance if a borrower is already in an FHA Loan. This particular program a lot of times doesn’t require the borrower to obtain an appraisal or in many cases document income and/or assets. As long as there’s a net tangible benefit to refinancing, one can take advantage of this great program.

However, and again, the increased MIP’s have made it more difficult for borrowers to take advantage simply because the higher MIP’s are offsetting the savings that lowering the interest rate initially provides.

Assumption

Assumption:

FHA loans are assumable, and while in the past most all mortgage loans were assumable, only FHA (as well as other Government loans, VA and USDA) are assumable these days. Therefore, a homeowner who is currently in an FHA loan can technically sell their loan with their home, just as long as the buyer can come up with the down-payment required between the purchase price and the seller’s outstanding and remaining balance on the loan.

We very well may see a lot of these transactions in the future once interest rates start to rise and homeowner’s who are in FHA loans with interest rates in the 4’s and 3’s start to sell their homes.

In addition to being much more flexible when it comes to the examples above, FHA insured loans allow for four (5) specialty options that help many prospective home-buyers and home-owners accomplish certain goals when financing their home. These programs are as follows:

Back-to-Work

FHA Back to Work – Extenuating Circumstances Mortgage Program:

As a result of the recent recession many borrowers who experienced unemployment or other severe reductions in income, were unable to make their monthly mortgage payments, and ultimately lost their homes to a pre-foreclosure sale, deed-in-lieu, or foreclosure. Some borrowers were forced to file for bankruptcy to discharge or restructure their debts.

Because of these recent recess related periods of financial difficulty, borrowers’ credit has been negatively affected. FHA recognizes the hardships faced by these borrowers, and realizes that their credit histories may not fully reflect their true ability or propensity to repay a mortgage.

To that end, FHA has released its new Back to Work: Extenuating Circumstances program, which allows for the consideration of borrowers who have experienced a qualified economic event to purchase a new home in as little as 12 months after bankruptcy, foreclosure, or short-sale.

203K

FHA 203k Loan:

This unique and specific FHA loan program provides home buyers the opportunity to buy and fix up a property, without exhausting their personal savings. Home buyers can purchase a property and include whatever costs to make required repairs or desired updates, or to fully renovate the property, all into one simple thirty-year fixed loan.

ALL work starts AFTER purchasing the property, using the money set aside by the mortgage lender.

Repo’s

HUD Repo $100 Down Program:

This is another unique and specific FHA loan program that is an initiative to attract buyers to purchase homes using FHA financing and homes that are in post-foreclosure. This means the homes have been repossessed, failed at auction and are now owned by the FHA/HUD.

In order to participate in the HUD $100 Down Program you must use FHA financing, the property must be used as the buyer’s residence and the purchase price of the home must be equal to or less than the appraised value of the property. This program can be used in conjunction with the 203k program as well.

GNND

HUD Good Neighbor Next Door (GNND) Program:

This program can only be used by Law Enforcement Officers, Teachers, Firefighters and Emergency Medical Technicians. The program can only be utilized by one of these professionals, and is only available on a HUD Repo Property.

The best part is that this property is offered to these professionals at a 50% discount, and can be used in conjunction with FHA’s 203k loan.

Energy Saving

FHA Energy Efficient Mortgage Loan Program:

The Energy Efficient Mortgage Loan program helps current or potential homeowners significantly lower their monthly utility bills by enabling them to incorporate the cost of adding energy efficient improvements into their new home or existing housing.

This FHA program eliminates the need for homeowners who are interested in making their home more energy efficient to take out an additional mortgage loan to cover the cost of the improvements they intend to make to their property. The program is available as part of a FHA insured home purchase or by refinancing your current mortgage loan.

Lastly, it should be noted, that the single largest myth about FHA insured mortgage loans, is that many people believe that one has to be a first-time homebuyer to use an FHA insured mortgage loan, and this is simply not true.

Requirements

Borrower Requirements

  • Owner Occupied only – borrower must live in the home as a primary residence
  • Minimum 580 Credit Score
  • Full income / asset documentation only – W-2 and/or tax returns
  • 3.5% minimum down-payment
  • No minimum borrower contribution required – 100% down payment can be gift
  • Approved down-payment buyer assistance can be used up to 100% combined loan to value
  • Maximum 46.99% front end, 56.99 back end debt to income ratio with automated underwriting approval

Terms

Loan Terms

  • 30 Year Fixed
  • 15 Year Fixed
  • 3/1 | 5/1 ARM – Adjustable Rate Mortgage
  • Upfront Mortgage Insurance Premium can be paid in cash by the buyer, the seller, or financed into loan amount
  • Annual Mortgage Insurance Premium (paid monthly)

Property Type

Property Requirements

  • Properties eligible for FHA financing include:
  • One (1) Family Residence – single family residence (SFR)
  • Two (2) Family Residence – duplex (owner must occupy one unit)
  • Three (3) Family Residence – triplex (owner must occupy one unit)
  • Four (4) Family Residence – fourplex (owner must occupy one unit)
  • Single Family One (1) Unit Condominium – with HOA approval
  • Single Family Attached One (1) Unit Townhome – with HOA approval

Loan Limits

Loan Limits

The maximum loan amount allowed when using an FHA insured mortgage is determined by the County you live in. Loan amounts can also vary based on the number of units in the property.

Example 1: FHA Loan Limits for Denver County, Colorado

  • One (1) Family Residence – $391,000
  • Two (2) Family Residence – $500,550
  • Three (3) Family Residence – $605,050
  • Four (4) Family Residence – $751,900

Example 2: FHA Loan Limits for Boulder County, Colorado

  • One (1) Family Residence – $408,250
  • Two (2) Family Residence – $522,600
  • Three (3) Family Residence – $631,750
  • Four (4) Family Residence – $785,100

Example 3: FHA Loan Limits for Weld County, Colorado

  • One (1) Family Residence – $271,050
  • Two (2) Family Residence – $347,000
  • Three (3) Family Residence – $419,425
  • Four (4) Family Residence – $521,250

Example 4: FHA Loan Limits for Routt County, Colorado

  • One (1) Family Residence – $625,500
  • Two (2) Family Residence – $800,775
  • Three (3) Family Residence – $967,950
  • Four (4) Family Residence – $1,202,925

* 2014 FHA Mortgage Limits – SEARCH MORE COUNTIES

 

Credit Issues

Waiting Periods after Credit Hardship

  • Two (2) Years from Discharge of Chapter 7 Bankruptcy
  • One (1) Year from Discharge of Chapter 13 Bankruptcy**
  • Three (3) Years from Foreclosure, Short Sale or Deed in Lieu of Foreclosure**
  • A borrower is eligible to apply for and close on an FHA Mortgage during the repayment period of a Chapter 13 Bankruptcy, however must wait one (1) year from the Discharge of a Chapter 13 Bankruptcy to apply for and close on an FHA Mortgage, if the borrower is not the repayment period of a Chapter 13 Bankruptcy.

Christian Durland NMLS#249348 | Colorado Loan OfficerChristian Durland NMLS#269348 I've been in the Mortgage Industry since 2002. Since theres no one size fits all solution, my team and I focus on understanding each clients unique short and long-term financial goals, and then recommending the optimal financial instrument (mortgage), whether its for a new home purchase or refinance.
I've established a strong network of professionals within the Real Estate and Financial Services Communities to provide the valuable resources necessary for our clients to be financially successful.